Process: 135/2018-T

Date: November 26, 2018

Tax Type: IRS

Source: Original CAAD Decision

Summary

This CAAD arbitration case (Process 135/2018-T) involved a dispute over IRS capital gains taxation arising from property reinvestment. The claimant sold a co-owned property in December 2015 for €205,000 (originally purchased in 2009 for €75,910.50) and declared both the capital gain and intention to reinvest in the 2015 IRS return. After declaring the reinvestment value in the 2016 return, the Tax Authority (AT) identified discrepancies and issued an assessment of €11,119.24, concluding that the reinvestment was not properly substantiated despite the claimant's response during prior hearing. The claimant challenged this assessment through CAAD arbitration in March 2018. However, before the arbitral tribunal could examine the merits regarding reinvestment rules and tax domicile requirements, the AT annulled the contested assessment in October 2018 and refunded the disputed amount. This rendered the proceedings supervenient useless (inutilidade superveniente da lide), a ground for termination under Article 287(e) of the Civil Procedure Code. The tribunal addressed cost apportionment under Article 536 of the CPC, noting that when a claim is well-founded initially but becomes moot due to supervening circumstances, costs are the respondent's responsibility if the futility is attributable to them. Since the AT could have revoked the assessment within 30 days of notification under RJAT but only did so months later after extensive procedural steps, the tribunal would likely attribute costs to the AT, demonstrating that taxpayers can successfully challenge IRS assessments through arbitration even when resolution occurs through administrative reversal rather than substantive decision.

Full Decision

ARBITRAL DECISION

REPORT

A..., taxpayer no. ..., resident at Rua..., no. ..., ..., ...-.... .., Loures (Claimant), submitted on 21/03/2018 a request for arbitral pronouncement, in which he petitions for the annulment of the assessment act for Personal Income Tax (IRS), for the year 2016, in the total amount of € 11,119.24.

His Excellency the President of the Ethics Council of the Administrative Arbitration Centre (CAAD) designated, on 12/04/2018, the signatory of this decision as sole arbitrator.

On 01/06/2018 the arbitral tribunal was constituted.

In compliance with the provision of article 17, paragraph 1 of the Legal Regime for Tax Arbitration (RJAT), the Tax and Customs Authority (AT) was notified on 05/06/2018 to, if it so wished, submit a response and request the production of additional evidence.

On 10/07/2018 the AT responded, raising the active lack of standing of the Claimant, both as an exception and by way of objection.

On 10/07/2018, by arbitral order, the Claimant was notified to pronounce itself on the exception of active lack of standing; production of witness evidence.

On 17/07/2018 the Claimant responded to the exception of passive lack of standing raised by the AT; production of witness evidence.

Accordingly, on 25/07/2018, by arbitral order, this arbitral tribunal decided to designate 07/09/2018 for the holding of the meeting provided for in article 18 of the RJAT.

Due to the unavailability of the arbitral tribunal on the dates subsequently suggested by the parties, on 04/09/2018, by arbitral order, the holding of the meeting provided for in article 18 of the RJAT was rescheduled to 28/09/2018.

Considering the reasons invoked by the AT, on 27/09/2018, the arbitral tribunal determined the rescheduling of the holding of the meeting provided for in article 18 of the RJAT to 25/10/2018.

On 23/10/2018, the AT requested from the arbitral tribunal the notification of the listed witness – President of the Parish Board of ... – as the witness was not available, and also the setting of a new date for the holding of the meeting provided for in article 18 of the RJAT.

On 24/10/2018, by arbitral order, this arbitral tribunal decided to reschedule to 29/11/2018 the holding of the meeting provided for in article 18 of the RJAT, determine the notification of the listed witness – President of the Parish Board of ... – and extend the deadline for the delivery of the arbitral decision until 01/02/2018.

On 07/11/2018, the listed witness – President of the Parish Board of ... – submitted a request for justification for non-attendance at the meeting provided for in article 18 of the RJAT.

On 09/11/2018, by arbitral order, this arbitral tribunal decided to consider the non-attendance of the listed witness justified, questioning the AT regarding the substitution of the witness.

On 15/11/2018, the Claimant presented proof of restitution of the amount paid corresponding to the IRS assessment for the year 2016.

On 16/11/2018, the AT confirmed the annulment of the IRS assessment act for the year 2016, waiving the production of evidence requested.

On 19/11/2018, by arbitral order, this arbitral tribunal decided, in accordance with the procedural principles set forth in article 16 of the RJAT, to consider the production of evidence requested by the parties unnecessary and to designate 30/11/2018 for the delivery of the final decision.

PRELIMINARY EXAMINATION

The arbitral tribunal was regularly constituted.

The parties have legal personality and capacity and are legitimate, with no defects in representation.

The proceedings are not affected by any defects that would impair their validity.

Consequently, the conditions are met for the final decision to be rendered.

FACTUAL MATTERS

FACTS DEEMED PROVED

Based on the documents filed in the proceedings, the following is deemed proved:

The Claimant acquired, on 11/03/2009, the autonomous fraction designated by the letter "F" of the urban property located at ..., numbers ..., ..., ... and ... for the acquisition value of € 75,910.50, pursuant to a notarial deed executed.

Said property was acquired in co-ownership with B... .

On 17/12/2015, said property was disposed of for € 205,000.00.

The Claimant declared the capital gain and his intention to reinvest in Table 5A of Annex G of the IRS Form 3 declaration for the year 2015.

The Claimant declared the value of the reinvestment, indicating it in Table 5A of Annex G of the IRS Form 3 declaration for the year 2016.

Due to the existence of some inaccuracies in the IRS Form 3 declaration for 2016, the Claimant was notified by order dated 09/11/2017 to exercise prior hearing rights.

On 04/12/2017, the Claimant exercised prior hearing rights.

From the analysis of the documents/arguments presented during prior hearing, regarding the notification of the discrepancies identified in the IRS Form 3 for 2016, the AT concluded by order dated 12/12/2017 that the declared items were not substantiated, proceeding with the assessment note under review.

The Claimant submitted, on 21/03/2018, the request for arbitral pronouncement at issue.

FACTS DEEMED NOT PROVED

There are no facts relevant to the decision that have not been deemed proved.

PRELIMINARY QUESTION TO BE DECIDED

The AT confirmed the annulment of the questioned act, with the consequent reimbursement of the tax paid.

In fact, the annulment of the contested assessment act renders it pointless to examine its illegality and leads to the conclusion that there is supervening futility of the case.

Now, supervening futility of the case is a ground for termination of the proceeding, under article 287, paragraph (e) of the Code of Civil Procedure (CPC) and must be considered ex officio.[1]

COSTS OF THE PROCEEDINGS

In accordance with article 22, paragraph 4 of the RJAT, "the arbitral decision rendered by the arbitral tribunal shall include the fixing of the amount and apportionment between the parties of the costs directly resulting from the arbitral proceedings (…)".

In general terms, in accordance with article 527, paragraph 1 of the CPC (applicable by virtue of the reference provided in article 29, paragraph 1, subparagraph (e) of the RJAT), the decision that judges the action or any of its incidents or appeals shall condemn in costs the party that gave rise to them or, if there is no judgment on the merits of the action, whoever benefited from the proceedings.

In this context, paragraph 2 of the said article specifies the expression "gave rise to", according to the principle of failure, understanding that the losing party, in proportion to the extent of its loss, gives rise to the costs of the proceedings.

However, in accordance with article 536, paragraph 1 of the CPC, "when the claim of the (…) claimant or the objection of the (…) were well-founded at the time they were brought or raised and ceased to be so due to supervening circumstances not attributable to them, the costs shall be apportioned between them in equal parts", and, in accordance with paragraph 3 of the same article, in the case of termination of proceedings due to supervening futility of the case, "(…) the responsibility for costs shall be borne by the (…) claimant, unless such impossibility or futility is attributable to the (…) respondent, in which case it is the latter who is responsible for all costs" [emphasis ours].

Now, the IRS assessment that is the subject of the present request for arbitral pronouncement was annulled by the AT on 31/10/2018 (date of the reversal of the assessment note), that is, after the submission of the request by the Claimant (21/03/2018).

It should be noted that, as the request for constitution of the arbitral tribunal was accepted by His Excellency the President of CAAD on 21/03/2018 and notified to the AT on 26/03/2018, the latter could "(…) within a period of 30 days from notice of the request for constitution of the arbitral tribunal, proceed to revoke, ratify, reform or convert the tax act whose legality was raised (…)", as provided in article 13 of the RJAT.

In fact, although the AT internally annulled the assessment act that is the subject of the request for arbitral pronouncement on 31/10/2018, it nonetheless allowed this arbitral tribunal to be constituted on 01/06/2018.

Accordingly, in the present case, taking into account that there is a ground for termination of the proceedings attributable to the AT (supervening futility of the case, by reason of annulment of the questioned act, as set forth above), the responsibility for costs should be entirely imputed to the AT.

DECISION

With the grounds set forth above, the arbitral tribunal decides:

To declare the proceedings terminated due to supervening futility of the case, under article 277, paragraph (e) of the CPC (applicable by virtue of the reference provided in article 29, paragraph 1, subparagraph (e) of the RJAT), with the consequences flowing therefrom;

To condemn the AT to pay the costs of the proceedings.

VALUE OF THE PROCEEDINGS

The value of the proceedings is fixed at € 11,119.24 (eleven thousand, one hundred and nineteen euros and twenty-four cents), in accordance with article 97-A of the Code of Tax Procedure and Process (CPPT), applicable by virtue of subparagraphs (a) and (b) of paragraph 1 of article 29 of the RJAT and paragraph 2 of article 3 of the Regulation for Costs in Tax Arbitration Proceedings (RCPAT).

COSTS

Costs to be borne by the AT in the amount of € 918 (nine hundred and eighteen euros), in accordance with Table I of the Regulation for Costs in Tax Arbitration Proceedings, pursuant to paragraph 2 of article 22 of the RJAT.

Let notification be made.

Lisbon, 26 November 2018

The Arbitrator,

(Hélder Filipe Faustino)

Text prepared by computer, in accordance with paragraph 5 of article 131 of the CPC, applicable by virtue of the reference in subparagraph (e) of paragraph 1 of article 29 of the RJAT. The drafting of this decision follows the spelling prior to the 1990 Orthographic Agreement.

[1] See Judgment of the STA, Case no. 016976, of 24-11-1993.

Frequently Asked Questions

Automatically Created

What are the IRS capital gains reinvestment rules in Portuguese tax law?
Portuguese IRS capital gains reinvestment rules allow taxpayers to defer taxation on gains from property sales if they reinvest the proceeds in another qualifying property within specific timeframes. Under Article 10(5) of the IRS Code (CIRS), taxpayers must declare their intention to reinvest in the year of sale (Table 5A of Annex G) and prove the actual reinvestment in the subsequent year's return. The reinvestment must typically occur within 36 months (or 24 months for certain cases) and involve the taxpayer's permanent residence or qualifying real estate. Failure to properly document the reinvestment or meet the legal requirements results in taxation of the capital gain in the year it should have been reinvested, as the Tax Authority attempted in this case before reversing the assessment.
How does tax domicile (domicílio fiscal) affect IRS capital gains reinvestment exemptions in Portugal?
Tax domicile (domicílio fiscal) is critical for IRS capital gains reinvestment exemptions because Portuguese tax law requires that the replacement property serve as the taxpayer's permanent residence in Portugal to qualify for deferral. The domicile requirement ensures that the exemption benefits taxpayers genuinely residing in Portugal rather than those making investment transactions. Article 10(5)(a) of CIRS specifically requires that the reinvestment concern the taxpayer's own permanent and habitual residence. The Tax Authority scrutinizes whether the declared tax domicile matches the actual residence where reinvestment occurs, and discrepancies can lead to disallowance of the exemption, triggering immediate taxation of capital gains plus potential interest and penalties.
What does 'inutilidade superveniente da lide' (supervening uselessness of proceedings) mean in Portuguese tax arbitration?
Inutilidade superveniente da lide (supervening uselessness of proceedings) occurs when circumstances arising after litigation begins render a judicial or arbitral decision unnecessary or without practical effect. In Portuguese tax arbitration under RJAT, this typically happens when the Tax Authority annuls the contested act and refunds the disputed amount during proceedings, as occurred in this case. Article 287(e) of the Civil Procedure Code (applicable to CAAD via Article 29 RJAT) requires tribunals to declare proceedings terminated when supervening futility occurs. This differs from substantive decisions on merits; instead, the tribunal addresses only procedural closure and cost apportionment. Under Article 536(3) CPC, if futility is attributable to the respondent (AT), they bear all costs, discouraging authorities from delaying legitimate refunds until after arbitration commences.
Can a taxpayer challenge an IRS capital gains tax assessment through CAAD arbitration in Portugal?
Yes, taxpayers can challenge IRS capital gains tax assessments through CAAD (Centro de Arbitragem Administrativa) arbitration under the Legal Regime for Tax Arbitration (RJAT). This case demonstrates the process: taxpayers file a request for arbitral pronouncement (pedido de pronúncia arbitral) against specific tax acts, an arbitrator is appointed, the Tax Authority responds (potentially raising procedural exceptions like lack of standing), and proceedings follow quasi-judicial procedures including evidence production and hearings. CAAD arbitration offers an alternative to administrative courts with potentially faster resolution (decisions typically within 6 months, extendable). The arbitral tribunal has full jurisdiction to examine both procedural and substantive tax law issues, including complex matters like reinvestment exemptions, valuation disputes, and whether assessments comply with proper notification and prior hearing requirements under the Tax Procedure Code (CPPT).
What happens when the tax authority refunds the disputed amount during CAAD arbitration proceedings?
When the Tax Authority refunds disputed amounts during CAAD arbitration, proceedings terminate due to supervening uselessness (inutilidade superveniente), as the claimant's objective is achieved without a substantive decision. The tribunal declares proceedings closed under Article 287(e) CPC and addresses only cost apportionment. Under Article 536(3) CPC, costs fall on the respondent (Tax Authority) if the futility is attributable to them—specifically, if they could have resolved the matter earlier but failed to do so. In this case, the AT had 30 days from notification to revoke the assessment under RJAT but only did so months later after extensive procedural steps (multiple hearing postponements, witness notifications). This delay suggests the costs would be the AT's responsibility, creating incentive for authorities to promptly review challenged acts rather than defend untenable positions through arbitration, ultimately protecting taxpayer rights while promoting administrative efficiency.